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Life After SLO - Part 2

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Whazzup? Not much -- especially not stocks. But neither have they continued to plunge drastically. My portfolio is still optimized to do well in a bear market and I've left it that way believing that the overall bear has at least a year to run. I did sell 2 of my short-ETFs, SSG and REW this month. I needed to bring my total ETF allotment well below 25% and guessed that the semiconductor and the tech sectors had already taken the biggest of their falls. In addition I sold QID (short NASDAQ). That leaves SKF (ultra-short financials) FXF (long the Swiss Franc) and SRS (ultra-short real estate) as my next bear-plunge short bets.

I also bought SIMC for my MagicMicroCaps fund and bought back FSTR for my former-SLO fund.

Overall, I believe that optimism over the election will keep the markets doing better (or less badly) than would otherwise be the case for the next few weeks or months. However, I don't plan to attempt playing the interim ups and downs as I would have done if the contest were still running with the end-date looming.

Instead I am taking the time to study currencies more. For example, UDN (a short-the-dollar ETF) has risen over the last couple of years but not as much as I would have thought. And compared to the volatility of the stock markets its progress has been steady as a rock. You would think it would fluctuate with good and bad news as much as the ups and downs of the markets (whose movements it mirrors).

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Life after SLO2 - Part 1

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In the last days of StrategyLab 2 I dumped UDN (short the dollar) which inexplicably had not been growing as much as I thought it should lately, and bought FXF (long Swiss Franc) in its place. During the final days, the stock market went down and my bear-market ETFs went up so that they exceeded the 25% ETF limit. When trimming down to remain in compliance, I sold all the FXF because I really didn't understand why it had been doing so well and wasn't sure the trend would continue. After reading today's article at MoneyAndMarkets.com I understand the situation a little better.

Per Jack Crooks, one of the article's writers, "When a crisis shows up anywhere in the world, investors have traditionally rushed to the relative safety of the Swiss franc because of Switzerland's role as a safe haven in a time of turmoil.... Plus, the Swiss central bank still has a very large reserve of gold relative to other major countries in the world. But the clincher is the Swiss carry trade.... Step 1. Investors borrow Swiss francs at very low interest rates. Step 2. They convert the Swiss francs into U.S. dollars, British pounds and other currencies. Step 3. They take that money and buy high-yielding, riskier investments. That's what's called the Swiss franc carry trade. Now, let me show you what's likely to happen next ... First, the risky investments start going sour -- because real estate is collapsing, or stocks are falling, or banks are failing, or some combination. Second, these investors get scared. They suddenly want to get rid of their riskier investments. So they sell. Third, they rush to buy back Swiss franc to repay their loans. And when they rush to buy Swiss francs, naturally, they drive up the value of the Swiss franc."

Looking at the early market figures, I saw stocks were up and FXF was down again (as were other bear ETFs) so I bought it back, with the intent of holding it longer-term this time.

When the market resumes the bear trend and my ETFs go too far up again, I'll have to decide where to trim in order to stay under 25%. But I can put off that decision for now. With StragegyLabOpen 2 at an end, I can take a little more time and concentrate on optimizing the fund for longer-term performance at Marketocracy.

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What I've Learned

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1. In a bear market I cannot just seek out superior companies. I have to seek out the best industries and countries, then look for the best companies in those areas.

2. ETFs are useful when I dont know enough about an industry or a country to be confident picking the best stock in that field. In addition, I can sometimes pick a good foreign stock by looking at the companies the ETF is invested in.

3. Short ETFs are great! For someone not sophisticated enough to be able to short effectively (like me) short ETFs are the way to go in a bear market.

4. Unlike a thinly traded microcap, with a larger company you really can, to a certain extent, make a prediction about its upcoming stock direction from the record of the market's past movement in it. Many thanks for Jim Van Meerten for getting me started on the right path for this.

5. To make the most money possible in a bear market one needs to be able to take advantage of the short bull rallies. This means being very nimble, changing strategies and being good at technical analysis. Easier said than done. I should practice this, maybe with a separate "throw-away" Marketocracy fund. However, right now my main fund does better when I stick with my longer-term, bear-market bets and grit my teeth until the market goes back down again.

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Wrap Up

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Today is the last day of the contest. Recently I made some last-minute tweaks. I sold some steel as it started to fall. Bought some coal (BTU and ACI) instead. UDN (Short the US dollar) had been inexplicably flat in recent weeks so I sold it and bought FXF (long the Swiss Franc). FXF rose along with all the other bear ETFs. I sold FXF plus some QID to get my percentage of ETFs down under 25% of the fund (max allowed). I bought more gold stocks and a bit more of some others I didn't have much of a stake in.

As of this moment my fund is up a bit, while the major indices are down.

During the course of the contest I've learned that I'm not very good (yet) at short- medium-term trading; however, for the first time these tweaks have actually paid off (so far).

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There's Oil in Them Thar Hills

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And gold, too. The problem is getting it out.

Yes, the Rockies really do still have a lot of gold. Unfortunately it is mixed in with a lot of dirt. A Google search will net you surface mining equipment including modern, automated pans and sluices. A panning vacation can be a fun family outing for Denverites and a good lesson in economics for the kids. You can catch a few, pretty bits to float in a vial of water as a souvenir. But will your efforts pay for the gas it took to drive to the mountains? Nope.

As for oil shale, this is a Colorado "resource" that has been around for a long time; however extracting the oil costs more energy and dollars than you will get out of it, even with today's prices. In 1982 Exxon cancelled its $5 billion Colony Shale Oil Project near Parachute, Colorado turning the new community into a ghost town overnight. Per an article on the Web, in response to this the US government terminated the subsidies they had been pouring into development of this technology. According to local gossip it was the other way around: the whole thing was a boondoggle and, when it became obvious the government would soon quit throwing good money after bad, Exxon pulled out.

Today, Royal Dutch Shell (RYDAF.PK) says they have a new technique that may eventually convert shale to petroleum at a cost of only about $30/barrel. A "Fortune Magazine" article described their process as follows: "Shell drills 1,800-foot wells and into them inserts heating rods that raise the temperature of the oil shale to 650 degrees Fahrenheit. To keep the oil from escaping into the ground water, the heater wells are ringed by freeze walls created by coolant piped deep into the ground; this freezes the rock and water on the perimeter of the drill site. Eventually the heat begins to transform the kerogen (the fossil fuel embedded in the shale) into oil and natural gas. After the natural gas is separated, the oil is piped to a refinery to be converted into gasoline and other products." The frozen "wall" is meant to keep oil from seeping into the local water.

Speaking of water, the process will also require a lot of it. The Fortune article says, "...some of the water it intends to utilize will be salinated water pumped from deep aquifers that are not part of the conventional water supply." And where will the rest come from? We are talking about high, arid mountains not that far from the Continental divide! There's not that much local water to begin with and our downstream agriculture needs every drop we can collect.

Has Shell really taken into account adequate budgeting for environmental remediation? Especially if, after the decades necessary to develop the project, their idea doesn't work well enough to be profitable? If they abandon the project what happens to all that salinated water in the "wall"?

If Shell wants to spend their own money (not my tax dollars) on a humongous, experimental project which sounds really wacko, that would be OK with me if only I could be sure my state's economy and environment would not ultimately get clobbered. Many Coloradoans are understandably skeptical and are opposed to the US government allowing Shell access to the national land they want.

Colorado also has a lot of wind and sun which we are developing into energy sources. It's true that wind and solar technologies, also in early stages, will take decades to develop into an energy backbone. The question is where do we encourage our economy to expand and where do we put our investment dollars? There is only so much R&D money to go around. Personally, I'd prefer oil investment go to underwater drilling such as the new Brazillian underwater oil fields. Although underwater oil takes time and effort to access, it looks much less iffy than oil shale. The US should develop nuclear, like much of the rest of the world. Plus we should spend more effort on sun, wind and perhaps algae. The strength of this country has always been in innovation. We need to once again become leaders in SOMETHING the entire world wants and new energy technology will be in demand for quite a while.

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HEI is Low

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I am debating whether to sell some (or all) of HEICO Corp. (HEI) which is at present the worst-performing stock in my StrategyLab Fund. On July 31, 2007, this was one of my very first picks for SLO1. At that time I was looking for both value and growth (still am) while avoiding US stocks in housing, commercial REITs, utilities, banks, brokerages and insurance companies due to the upcoming financial crisis. (As a side note, utilities subsequently did OK in spite of a prediction that they would be adversely affected by a credit crunch.)

Heico, which describes itself as an "aerospace, defense and electronics company", did relatively OK in the bear market until a recent, huge, unexplained stock plunge. Although they issued guidance for '08 indicating they'd be slightly below analysts' expectations, there was no really bad news that I could see. On the contrary, the quarterly EPS was up from this time last year. Well, the decline could be part of the general airline industry sector drop.

Basically, this company makes discount, brand-knockoff, airplane parts. As the Wal-Mart of the aircraft industry I think it should do well in coming months. Airlines will be looking for the cheapest parts they can get. They'll refurbish old planes instead of buying new. When they sell off some of their fleet at bargain prices the new owners will want to renovate inexpensively.

Nevertheless, the stock is down.

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